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*This article was written by Catherine Wijnberg, Harnold van der Vegte in October 2015 

‘Retail plays a vital role in the South African economy and shopping centers are at the heart of this significant economic activity’, according to Amanda Stops (General Manager of the SA Council of Shopping Centers). After a strong growth of around 6% in 2010 and 2011 and an average growth of 2.5% the last three years, the South African retail sector amounts for over 705.5 billion rand in 2014. 

The numbers of retail centers have been skyrocketing over the last decades; whereas only 15 retail centers were developed in the period of 1985-1989 with a total floor space of 172,923m, the period 2005-2009 gave rise to 32 retail centers with an impressive total floor space of 627,866mMalls have become a highly competitive play-ground for big retailers such as Shoprite, Pick ‘N Pay, SPAR and Woolworths, with added pressure now that Walmart has entered the South African market. 

In townships, retail centers are popping up like mushrooms in response to the rapid growth of household income among the township dwellersThe spending by black households as a percentage of the South Africa’s total ‘expenditure cake’ increased from 35% in 1993/4 to 57% in 2013/45With over 2,200 townships in South Africa – a legacy of the Apartheid-regime – these residential areas of largely black Africans are a major driver of the country6. Despite their rising income, a survey of Glue Metric (2007) showed that almost three quarters of middle-income earners in townships plan to remain in townships for some time (29%) or regard the township areas as their home without any intention to move (43%)7The rise of retail centers is further spurred by an unprecedented urban sprawl. Urbanisation has increased from 52% in 1952, to 63% in 2014 with an expected urbanisation level of over 68-70% by 2030. 

The South African cake is getting bigger and bigger and the associated commercial growth has given rise to more than 23 million square meters of shopping centers – in comparison with 4 million m2 in 1993/4 – with almost 2,000 shopping centers in the country. This massive growth has made South Africa number 6 in the world’s ranking in number of malls and number 7 in terms of shopping center floor area. There are concerns that the South African retail sector will reach its saturation point soon10, especially as this point is already reached in specific metropolitan areas – most notably Gauteng where 40-50% of the country’s malls have been built11. Dr. D.A. Prinsloo, Managing Director of SACSA Urban Studies, argues that this point of saturation mostly account for convenience and neighborhood centers. ‘But where you see most of the growth is in your regional centers and super-regional centers’, according to Prinsloo. According to the GRD Index of A.T. Kearney, the South African retail market has already reached a developed stage for years. This entails that consumers are already more used to modern and organised retail, the discretionary spending is higher, competition is fierce (both from local and foreign retailers), and retail estate is expensive and not readily available13. As a result, South Africa is often used as the ‘stepping stone’ for other retailers and developers into the rest of the continent. 

The impact of the mall 

Consumers are attracted towards shopping malls by the wide assortment of stores, continuous sales promotion, and the ambiance and entertainment within a shopping mallPrior to the development of a mall in the region, people had to travel over long distances to do their shopping causing their disposable income to leak into the hands of taxi– and bus drivers  

Mall development shifts out-shopping towards in-shopping, meaning that residents of an area patronise shops in the area in which they live. An example of this is the township Soweto, the biggest beneficiary of retail infrastructure development since 1994. Previously underserved by formal retail businesses, residents were confronted with a limited selection of goods, poor service, and generally higher prices for products than city residents; a unique South African phenomenon as a results of the Apartheid-regime. Township residents were forced to engage in out-shopping, especially higher income groups with car ownership who were able to do this17. Studies by the City of Johannesburg in 2005 estimated the demand for retail goods in Soweto to R4.2bn, of which only 25% was spent within the township1. With the new shopping center developments of Jabulani and Maponya, in-shopping patterns are changing as townships become favorite shopping destinations19. 

Urban agglomeration  

Retails centers can also play an important catalytic role in generating urban agglomeration by promoting a clearer identify, initiating re-development of derelict and unattractive areas and by doing so attracting more investment to the area. Robertson and Fennell (2007) examined the economic impact of four regional shopping centers in the UK, and concluded that shopping centers can have regeneration benefits. One of these malls is the MetroCentre in Gateshead (165,360m) that was built on a previous waterlogged ash dump creating 7,490 full time and 2,960 seasonal jobs. In this  case, despite an initial loss of 18% in full time jobs in the early establishment phase (1984-1991), the number of part time jobs in the same period increased by almost 30%. In addition, an extensive range of other developments was recorded in adjoining sites such as the Marriott Hotel, an Asda supermarket, and an IKEA furniture store. Another UK example is the Braehood Centre (55,000m) built in a derelict power station. This new mall provided a focal point that stimulated new development activity in this previously neglected area such as the £65m XScape leisure complex, an IKEA furniture store, and a £15m Audi headquarter and training center 

The downside 

Despite the convenience and power of attraction of malls  both for customers and investors – there are negative impacts on local entrepreneurs and small local businesses, namely smaller businesses find it difficult to secure space in the mall and they find it difficult to compete with the marketing budget of the mall. Moreover, malls will create an outflow of money from the local ecosystem which normally circulate between and sustain local entrepreneurs. 

It can be challenging for small local retailers to obtain their own space within newly-developed malls as mall developers prefer established chains with more predictable and stable incoming cash flow22. For example, Futuregrowth Community Property Fund (CPF) – an R3.1bn pension fund owning 24 of SAs shopping malls – report that many small tenants within their malls could not pay their rent 18 months after their establishment. As a result, CPF hold a tenant mix for their malls consisting of 75% national chains, 15% regional tenants, and only 10% smaller local entrepreneurs 

In practice, rental practices are greatly to the advantage of big retail chains with significantly lower rental rates offered to national chain stores – notably supermarket groups, in an effort to secure well-known anchor tenants resulting in inflated rentals for smaller tenants. In many cases, rental agreements contain escalation clauses that raise the rental price at the moment it is time for agreement renewal. This percentage is to the advantage of larger tenantsWhilst smaller local retailers are discouraged by this practice, such retailers are essential to maintain the attractiveness of the mall shopping experience.  

Research in Singapore among 1,000 mall visitors (Ibrahim and Galven, 2007) shows that while the anchor tenant image is of much importance, local specialised tenants are especially needed to provide variety in types of products they can offer, especially trendy, innovative, unique and not easily available offers25. For shopping centers to position themselves to appeal to consumers’ tastes and preferences the co-existence of anchor and smaller tenants is needed  

In South Africa the rapid influx of malls is putting severe competitive pressure on local entrepreneurs situated in the proximity of newly-developed malls, with claims that they are as a result at risk of ‘joining the ranks of the unemployed. Small businesses that tend to remain in situ despite the development of a new mall, find they are more vulnerable to trade and shopper flow diversion 

The impact of mall development on the activities of adjacent local businesses was investigated in Soshanguva, a township 25km north of Pretoria, where two malls were developed in 2006 (Ligthelm, 2008). Of the 100 small informal and formal businesses located within five kilometers of the newly-developed shopping mall, 47% reported a decrease in the number of small retailers, 66% reported a decline in turnover, and 61% reported drop-down in profitability, after the malls became operational. In additional the retailers located closer to the mall reported greater impact on turnover, profitability, stock size, product range, and the average survival score 

Similarly, a survey among 82 small retailers and 30 hawkers within a 1km-radius of a new-established mall in Mumbai (India) confirms this impact: 71% of the respondents experienced a decline in sales performance of which 27.5% more than 30% decrease in turnover 

Often underestimated is the money that leaks out of the local economy when a mall is built within a region. Chain stores contribute less to the local economy as income (other than local salaries) exits directly to the holding company, whereas local stores keep a greater proportion of income circulating within the economy31. Money spent with local service providers (e.g. accountants and printing services), finance providers (e.g. community banks), and marketing services (e.g. local broadcasting station and graphic designers) injects a multiplier-effect through the community32. In the USA a comparison of 22 local businesses (15 retailers/7 restaurants) and seven national chains (4 retailers / 3 restaurants) concluded that an average of 60.5% of all revenue of local businesses returns to the local economy whereas only 21% of all revenues of the national chains is recirculated in the local markets they are active in 

The importance of local business in the economy 

Although most consumers regret the loss of local entrepreneurs in their vicinity, they are caught in the vicious circle where choice and price, work and travel patterns, brands and advertising, all conspire to undermine the desire for a vibrant local economy. As a result, local entrepreneurial activity can virtually be wiped-out by the rise of shopping centers – a development worrisome for any country such as South Africa that is already plagued by low entrepreneurial activity – with a TEA (% entrepreneurial activity of 25-6yr population) of only 6.97% in comparison to 14% among other efficiency-driven economies. According to Mike Herrington, GEM executive director, a TEA of 14% would help to reduce unemployment and alleviating the poverty experienced by much of South African’s population. For a country where small business is seen as central to growth, employment and black economic empowerment ambition, shopping center developments represent a long-term threat to the success of emerging businesses. 

Entrepreneurial activity is essential for economic growth. Entrepreneurs provide greater product diversity, foster productivity, and (in)directly lower prices by pushing established firms to improve their performance or force worn-out firms to close their doors. By entering new (or existing) markets with new solutions, entrepreneurs can build industries with potential to become the engines of future growth——-. Although entrepreneurs are continuously destroying and creating job, information from the US government (BDS) concludes that startups (<1year) created an average of 3 million jobs per year in the US (1977 to 2005) – whereas existing enterprises (>1year) destroyed an average of 1 million jobs per year. The astounding large effect of job creation in only the first year of a firm’s life indicates a significant enabler of (long-term) economic growth 

The growth options 

There are two main growth scenarios: an organic growth by local business and a rapid growth by fulfilling the needs by direct mall development. The latter alternative is rapidly applied in many upcoming townships, a destructive development that prevents bright local ideas to ever reach the surface. A third scenario is proposed in order to surpass the loopholes in the two main growth options.  Figure 1 illustrates the effect of all three scenario with regards to the growth of the local economy and the distribution of businesses within the region.  

The organic growth scenario 

In the organic growth scenario, a local economy grows as small enterprises within that region expand in a natural, organic way. This entails a combination of adaptability in business practices, customer-driven improvements, and well-chosen investments to obtain a stronger foothold that can be nurtured to build a bigger and better enterprise over time39. Within this local economy some initiatives will eventually reach higher ground and become healthy and successful medium to large enterprises that create jobs for the community. The time span in which this is achieved is often slow. Often, as is the case in many townships across South Africa, these scattered and uncoordinated local enterprises cannot completely satisfy or swiftly adapt to consumer demands. As the small enterprises are not able to keep pace with the needs of the local residents, they lose consumers who shop in adjacent regions. Job creation and investment in-flow is insufficient to meet the growing community demands.  

The rapid growth scenario 

Increasingly the rising demand for retailers within a specific region is met by the development of a shopping mall. The mall provides all kinds of services and products (e.g. furniture, food, pharmacy, and clothes) under one roof, and the combined marketing budget is utilised to attract significant customer numbers. This drives an initial impetus for in-shopping (increased total turnover within region) and employment (for these newly-created jobs) within the region. However in the longer term these large scale malls influence the ability of local initiatives to flourish and obstruct growth within the local ecosystem. Once the mall is erected and operational in its full extent, nearby local retailers experience decline in sales volume – a fall that in most cases cannot be attributed to general trends in consumer spending in the region. Initially trade diversion occurs as consumers are drawn to the shopping centers. Once established the turnover of the shopping center will stabilize while local retailers experience loss and spatial reconfiguration of dominant shopping patterns.  

A mixed model scenario 

In the Mixed model scenario Mall development responds to consumer need for convenience shopping, and acts as potential catalyst for further investment in the region, with long-term detrimental impact on the local economic ecosystem overcome using a focused approach to enhance growth in the surrounding SME communityMalls work in tandem with small local retailers to create a sustainable entrepreneurial eco-system for local ambitions to evolve. This requires an unconventional attitude of Mall stakeholders and strong initiative and commitment of local entrepreneurs. Around the world, various players have adopted this approach with success. 

An example is the Muscat Grand Mall in Oman which has initiated the development of an area of 2,500m2 that includes space for 50 retail outlets for the growing SME sector. Retail space is rented at nominal prices to enterprises for the first one to three years. Entrepreneurs can spend up to three years to develop administrative, accounting, and leadership skills under guidance of industry experts and become independent and confident to run their own business afterwardsIn addition, SMEs are provided with funding and support in creating marketing campaigns that enhance the attractiveness of the business. 

In the Philippines, Pop Culture entrepreneur Gary Ramirez has given SMEs a fair chance on retail space, by subletting to them a total of 280 square meter of prime retail space in two major malls. Working as an intermediary between the mall owners and local SMEs, Ramirez is able to generate new tenants for the mall owners without them having to deal with very many small clients. “And for SMEs, they get a chance to sell their goods in malls without going through the rigorous selection process of mall operators,” Ramirez said 

Another example is Virtuous Retail, a mall developer-cum-operator that included an incubation center for entrepreneurs in a mall in Bangalore (India) opened in 2015. The mall developer has made 50,000 square feet available for a ‘plug-and-play workshop for bootstrapped entrepreneurs’A similar approach has been applied by UK-firm Petit Miracles Hub that initiated a creative retail space within the West12 shopping center in London to provide entrepreneurs with their own space to showcase and sell their products, as well as shared meeting spaces and business support from experts to help businesses grow successfully 

All these case studies exemplify the wide range of practices that can be used to leverage the benefits of malls (e.g. central place, a lot of footfall, parking space, etc.) to uplift local entrepreneurship.  

The future 

For many though, this is a leap too far for many mall developers, who are driven by short-term results.  

The elements of this ‘mixed model’ can be broken into a simple blue-print to pave the way for a successful implementation of a growth strategy for lasting growth of the local eco-system. There are four key elements: 

A perfect place 

Location is key for success and local entrepreneurs should be grouped together in the vicinity of the mall, with a unique proposition that clearly differentiates them from the mall’s offerings. It should be an attractive and vibrant spot where consumers feel comfortable and welcome, and entrepreneurs can exhibit their ideas, gathering to connect and encourage entrepreneurial spirit. 

A financial push 

Entrepreneurs often fail as their cash runs out before their idea is accepted by the market and their investment reaches profit-status. In order to give these entrepreneurs more financial breathing space, the right financial support is neededOne such mechanism is a community fund or development union, which allows savings of local businesses to be used to grant credit to other local businesses at a more modest interest rate than regular banks would impose. Management of this non-for-profit union is elected from the local depositors and serves local entrepreneurs by providing loans under better conditions.  

In addition, initial rental payments could be subsidised (or guaranteed by governmental funding) to enable start-up entrepreneurs to bridge the gap between early start up and breakeven, allowing them to acquire experience until they are able to compete on an equal footing 

Financial support mechanisms can make the whole initiative more sustainable and, as a result, more appealing for mall developers, SMEs and investors. 

A shared proposition 

Local entrepreneurs that join forces will gain the benefit of economies of scales marketing – enabling them to compete with bigger retailers. One such ‘umbrella’ initiatives is collective marketing whereby local entrepreneurs can use social media platforms to position themselves as a shopping destination.  

Discount- or client loyalty cards can also be utilised in every ‘local’ shop 

Local groups can also combine to procure certain products in bulk and benefit from a strengthen procurement position. Local entrepreneurs can also improve their negotiating position in the purchase of services, ranging from cleaning services to accounting services.  

A helping hand 

To ensure that this concept will be a lasting success, and SMEs built for accelerated growth and exit, entrepreneurs need holistic guidance – especially in the first operational years. This should comprise hands-on training in business skills, strategic visioning, courses in HR/Compliance, and thorough marketing support to attract visitors to their premises. Regular brainstorm sessions, workshops, and personalised mentor support are needed to grow these entrepreneurs to maturity where they are capable of competing on a level playing field without relying on external support. 

In South Africa, the Waterfront complex has developed a successful mixed model solution over the past decade in which 500 small enterprises have been carefully fostered in adjacent ‘sheds’. These small businesses – largely hand-made goods, arts, health services and clothing – are now a notable drawcard for visitors, helping to turn the Waterfront into a destination for local and international shoppers rather than simple a shopping mall. 

The Waterfront report that their considerable investment in dedicated quality retail space, softer rental agreements and supportive business development services has resulted in significant tangible value for the small businesses, the larger shopping complex and the long-term appeal of the Waterfront itself. 

Notably 10% of the small businesses have graduated into the main retail centre, with hundreds of others choosing to remain in the ‘small business’ location which suits their business model. 

Conclusion 

There is evidence globally that the effect of Shopping Malls on the local economy of small enterprises, is frequently negative. The immediate appeal of ‘first world shopping’ of Retail malls brings short to medium term profit to the mall owners and to dominant players in the market (In South Africa 84 enterprises are reported to make up 80% of the total retail spend) but in the longer term the removal of money circulating in the local economy results in declining fortunes of the consumer base. 

In addition the appeal of shopping malls tends to decline as shoppers become bored with the standard offer, and seek greater diversity and fresh appeal. 

It is in the interests of the shopping malls, the local small businesses, and the consumer community to find better, more broadly beneficial longterm solutions. Some exciting concepts developed in South Africa include the ‘Waterfront model’ where by small businesses are nurtured alongside the main retail complex, creating benefit for all, and greater long-term appeal to consumers. Such mixed model solutions have great potential for replication. 

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